A Floating Fellowship

One crucial question raised by the latest monetary crisis was less financial than political: Could the nine members of Europe's Common Market agree on a joint solution to the speculative assault on the dollar and some of their own currencies? If the answer turned out to be no, the drive toward a more tightly knit Continent would have been dealt a major blow. But last week six of the nine worked out a plan that they could accept--and the other three eventually may join. As a result, official currency exchanges are scheduled to reopen this week, after an extraordinary shutdown of eleven business days.

The solution, as predicted, was a monetary "float"--a relatively free market in which currency prices are determined by supply and demand. But instead of precipitating a complete free-for-all, the six partners agreed on a joint float, in which their own currencies will remain fixed in value against each other while fluctuating in unison against outside money like the U.S. dollar or Japanese yen. Several nations had to compromise individual policies to make that solution possible. Most notably, West Germany increased the value of the mark 3%. That move, which will make German exports a bit more expensive, has little economic justification except that it may be necessary to calm speculation. France, for its part, reversed its long opposition to any kind of float. West German Finance Minister Helmut Schmidt hailed the agreement as an "optimal solution"; the Frankfurter Allgemeine Zeitung went so far as to label it "group sex."

Ante Up. Since their currencies are already floating individually, Britain and Italy decided not to join; Ireland followed Britain because of the two nations' close trade ties. But after their currencies sink slightly lower, London, Dublin and Rome may decide to join their Common Market allies. Meanwhile, Sweden and Norway asked to be included in the joint float, even though they are not EEC members.

The U.S. should benefit, because the dollar's price has declined slightly even since the February devaluation, making U.S. products correspondingly a bit less expensive in Europe. But Washington may have to ante up in another way. If the $70 billion in U.S. money now being held abroad is used to finance yet another speculative run on some currency, the U.S. may have to step in and buy up unwanted dollars with marks or other currencies in its reserves--or borrowed from its financial allies. In effect, the U.S. would then be helping the Europeans keep currency rates roughly in line with present positions.

That plan points up a drastic change in the focus of efforts to reform the tattered international monetary system. When exchange rates were supposedly fixed, monetary officials puzzled over how to define rules that would permit inevitable devaluations and revaluations to be made without causing financial and political trauma. That problem has now been solved, at least temporarily, by the float: exchange rates will be adjusted gradually and automatically day by day. Now the major task is to draw up standards governing when, and under what conditions, governments will be justified in intervening in currency markets to keep exchange rates from floating too freely.

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